A wrap-around mortgage is one method of obtaining financing for a home loan. It is only available on home loans that are presently assumable, or able to be taken over and paid by someone else. This means they’re not available in all instances. It’s a method of seller financing in most cases, where a seller extends credit or becomes lender to a borrower. The seller can profit from this if the loan is repaid as promised.
Basically, the wrap-around mortgage means that the seller of the home takes a loan to cover its existing mortgage and the current value of the home, and this wraps around or encircles the present mortgage that belongs to the seller. The buyer tends to pay the seller a small amount of equity downpayment. The seller can keep or spend the money from the new loan, perhaps purchasing a new house, but will still need to make monthly payments on the loan. The new buyer pays payments each month to cover the loan payments.
This type of mortgage may be one way to get credit for those with imperfect credit scores, though lender/sellers will want to be certain buyers have means of paying for loans. The seller also usually charges a slightly elevated interest rate above that which he or she can obtain in a new mortgage. Charging an extra point or two is customary. This means the seller can profit from the loan from these points. Seller/lenders get a little extra money by offering this transaction, since they may still be involved in the sale of the home up until the time that the loan is fully repaid.
To make certain that a wrap-around mortgage is legal and gives people full rights to their property after a deal is struck, people may have their real estate agent or mortgage broker help draw up contracts that specify rights. Even with contracts in place, there are noted criticisms of this type of loan.
One of these is that the seller/lender bears significant and potentially burdensome responsibility. If the new buyer doesn’t pay, he’s not responsible for the new mortgage. The seller takes this out and the seller is ultimately responsible for its payment. The mortgage is in the seller’s and not the buyer’s name. Additionally, sometimes banks do not allow wrap-around mortgage types or assumable loans on certain types of loans, and they may react very badly if they find a person has offered an assumable loan to someone else. Technically whoever owns the mortgage owns the house, so lenders like banks may be entitled to certain rights that supersede those of buyer or lender/seller.
A wrap-around mortgage can be an interesting concept. Some folks find this a good way to buy homes if they can’t obtain mortgages. Expert advice is needed to determine when these loans are appropriate and to decide if candidate buyers are likely to keep their promises and pay off mortgages as agreed.